# FCFF vs FCFE

Assume there is no debt. In this case, a DCF using FCFF is supposed to equal a DCF using FCFE. Now suppose there is no debt, but a lot of excess cash. If we use a FCFF approach then we have a much higher value than FCFE because we add back the cash. 2 Questions (1 regarding exam, 1 regarding practice) 1. For the exam, should we add back cash when using a FCFF DCF and there is no debt? 2. In practice, should we add back cash when using a FCFF DCF and there is no debt?

add back the cash??? to what? what are you referring to? you start either with NI or CFO … and adjust for non-cash items, working capital investments and fixed investments… since there is no net borrowings or interest expense adjustments…your FCFF and FCFE should be equal …

the cash balance on the balance sheet is a sort of comperhensive cash balance, which is including CFO, CFF and CFI.

… and all this while I though that FCFF will equal to FCFE when there is no outstanding debt (and hence no Interest expense) and the net borrowing was equal to 0.

Folks, to quote myself: “a DCF using FCFF is supposed to equal a DCF using FCFE” The key word: DCF In a FCFF DCF you subtract debt and add back excess cash to get the value of equity. In a FCFE DCF you do neither because a debt charge is already included in your cash flow in the form of interest. But if there is no debt, than a DCF with FCFF should equal a DCF with FCFE, theoretically. But a DCF with FCFF would add back excess cash, assuming there is some. A DCF with FCFE would not. What gives?

lxada269, i think you are confusing us. 1) if there is not debt discount rates are the same WACC = Cost of Equity 2) FCFE = FCFF - Interest*(1-tax) + change in NetBorrowing since there is no debt, Interest = 0, change in NetBorrowing = 0 -> FCFF = FCFE //another way to look at that equity holders are the only ones recieving cash flows from the firm (FCFE = FCFF) 3) DCF (FCFE) = DCF(FCFF) - MV(debt) -> DCF(FCFE) = DCF(FCFF) since debt = 0 I have no idea what you mean when you talk about adding back cash. i think you are confusing something.

I think you would add back cash to FCFE as well lxada, that’s where I think you are misunderstanding the concept. Maratkus, when he’s talking about adding back cash, he’s talking about for control valuations. In the CFAI texts it says for change in WC to use change in noncash current assets minus change in non interest paying short term debt such as notes payable. Then after the entire DCF value has been reached, value of cash is added back in as this is cash a buyer could immediately use to pay down the purchase price. However, this step is performed for both FCFE and FCFF valuations, thus arriving at the same theoretical value in a situation with no firm debt. I think that’s where he’s confused.

i see Black Swan. In the formula FCFF = NetIncome + NonCash Charges + I*(1-t)- changes in fixed assets - changes in net working capital changes in net working capital exclude cash and debt. is that what you mean?